Mortgage rates jumped following the release of the Fed’s latest policy statement on Wednesday. Although, the U.S. central bank left short-term rates unchanged at the conclusion of the October policy meeting, at the same time it sent a clear warning to markets that the door remains open for a rate liftoff in December. While this statement doesn’t mean that a rate hike at the December FOMC meeting is a done deal, but it signals that the decision whether to hike or not depends on the incoming economic data between now and then. Many market participants are still betting on a raise in short-term rates to take place sometime early next year, as recently released downbeat economic data hasn’t been supporting the case of an immediate rate hike.
As expected, the hawkish tone of the Fed statement had an impact on markets, and as a result U.S. government bonds pulled back and yields soared on Wednesday. Mortgage-backed securities, which lenders use to determine daily interest rates, got hurt as well and consequently mortgage rates increased. The average lender now quotes the 30-year fixed mortgage rate at 3.875%, but some of the more aggressive lenders are still offering it at 3.75%. The bottom line is that current mortgage rates remain close to 5-month lows, which makes home buying and refinancing attractive for borrowers.
In recent trading, the yield on the benchmark 10-year treasury note increased 5 basis points to 2.10%. Also, the yield on the longer-term 30-year treasury yield was higher during Wednesday’s trading session at it closed at 2.87%.
Now, on Thursday morning MBS pricing is in the red, following the release of the first reading on Q3 GDP. Although, the first estimate on Q3 GDP have missed expectations, it’s hurting mortgage bonds right now. Therefore, we wouldn’t be surprised to see some lenders issuing new rate sheets during the day. If things stay the same, mortgage interest rates may finish the day a notch higher. However, we should note that in the current volatile market environment mortgage rates can change multiple times a day.
National mortgage rates tumbled slightly in the week ended October 29, according to Freddie Mac’s latest weekly Primary Mortgage Market Survey (PMMS) released earlier today. The mortgage-buyer’s findings revealed, that the average rate on the benchmark 30-year fixed mortgage nudged lower by 3 basis points to 3.76% this week. At this time a year ago the 30-year FRM averaged a rate of 3.98%. The average interest rate on the shorter-term, 15-year fixed mortgage remained unchanged at 2.98% this week. Back in 2014, the afrorementioned mortgage loan averaged a rate of 3.13%.
Moving on to flexible adjustable rate mortgages, the average interest rate on 5-year ARM stayed frozen at 2.89% this week, the federal agency’s survey showed. A year ago this type of mortgage averaged a rate of 2.94%. On the other hand, the 1-year adjustable rate mortgage headed lower this week, with the average rate coming out at 2.54% versus 2.62% in the prior week. At this time last year the 1-year adjustable rate mortgage averaged a rate of 2.43%, according to Freddie Mac’s data.
Today’s economic calendar includes three pieces of data, namely estimation on third quarter GDP, fresh report on pending home sales and weekly jobless claims data. According to a report from the Commer Department released on Thursday, the advance estimate of third quarter GDP showed an economic growth of 1.5% in Q3. This is a slightly lower figure compared to the consensus expectation (an increase of 1.6%).
With regards to September’s Pending Home Sales Index, which shows the number of signed contracts for buying existing homes, it dropped 2.3% to a seasonally adjusted 106.8 last month, according to a fresh report from the National Association of Realtors released today. Economists had projected an increase of 1% for September’s pending home sales data. The current figure marks the second lowest level of the year, which is clearly not a good sign for the housing market and the broader U.S. economy.
The number of initial claims for state unemployment benefits rose by 1,000 to a seasonally adjusted 260,000 last week, according to the Labor Department’s data released on Thursday. The four-week moving average dipped by 4,000 to 259,250 which marks the lowest level for this indicator since hitting 256,750 in December 1973. This is a positive report, one that points to a fairly healthy labour market.
So the Fed hasn’t hiked rates in October, but left the door open for a liftoff at its upcoming policy meeting in December. As we stated before, the market isn’t expecting a rate hike this year, but there’s always a risk that the central bank raise rates unexpectedly. And with the hike isn’t priced in to bonds at this point, once it happens, it could catch the market flat-footed. This is a possible scenario, but currently we believe there’s a bigger chance that the Fed will hold off on raising rates until 2016. As of today, market participants are pricing in a 47% chance for a rate hike in December, according to the CME FedWatch tool, which is used by investors to predict future monetary policy.
If you are in the process of getting a mortgage and you are averse to risk, we suggest you to lock a rate sooner rather than later due to the above mentioned reasons. However, if you aren’t concerned about the Fed’s rate hike plans or you simply gamble on lower mortgage rates in the next few weeks, you can always float, but only float if you can afford to be wrong.
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